Question: Suppose there is a decrease in real money demand [L(R,Y)] in the US and a decrease in nominal money supply (M*) in Europe. Using

Suppose there is a decrease in real money demand [L(R,Y)] in the US and a decrease in nominal money supply

Suppose there is a decrease in real money demand [L(R,Y)] in the US and a decrease in nominal money supply (M*) in Europe. Using the short-run model of exchange rate determination, illustrate and explain what happens to the $/E exchange rate in the short run. b) Suppose there is a decrease in real money demand [L(R,Y)] in the US and a decrease in nominal money supply (M*) in Europe. Using the generalized model of exchange rate determination in the long run, explain what happens to the $/E exchange rate in the long run.

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The supply of money is represented by the vertical line Ms and the demand for money is represented by the downwardsloping curve LRY The equilibrium in... View full answer

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